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Fidelity Personal Retirement Annuity advice
Old 08-03-2010, 12:11 AM   #1
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Fidelity Personal Retirement Annuity advice

Since DW and I don't have any pensions, we decided to setup our own. We purchased this annuity from Fidelity back in 2001/2 with 500k and changed it to a no death benefit guarantee which reduced annual expenses to 1.15% in 2005. The current value is 767k. In hindsight, I'm wondering if this was the correct thing to do. Probably would've been smarter to setup a bond ladder to provide income, but we didn't need it at the time. We were both working and with double income, we maxed out all of our tax deferred savings opportunities and even front loaded a 5yr max investment for our son's 529 plan when he was 2 (now 10 1/2). I was in a high tax bracket and the state allowed immediate 100% reduction of income, so I took it. I'm now 47, DW 46, we're both out of work and we don't plan on going back. I've asked this of several financial planners and wanted to get some feedback from this group.

1) Does it make sense to terminate this annuity, take the 10% penalty and tax on the 267k in gains? I'm told that's about 45% in taxes. The idea is to setup an income stream instead.

2) Or is it better to convert this into a fixed income annuity? My payout would be $3,044/mo, of which $2000 is taxable. Fidelity also gave me a COLA payout option - $2,200/mo of which $1,500 is taxable, this option would take 15 years to match the non COLA payout.

3) Since we're considered so young, the recommendation I got today is it's better to take the payout now since we'll keep getting paid until the latter one dies (it's a joint survivor payout option). I was also told waiting a couple of years wouldn't change the payout much. The rep also ran a scenario assuming I was 10 yrs older, my payout would only be 3,444/mo. Obvioulsy this doesn't take in to account that the value has grown. Does anyone know of a way to calculate the best age to annuitize in my situation?

Our current expenses are under 50k/yr, so the annuitization would cover most of our expenses. The remainder will be covered by income generated from interest,dividends,etc. We've got our old house on the market, the hope is when it sells, it will cover most if not all of our only outstanding debt on the new house...which happens to be 24k/yr.

Looking forward to your feedback!
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Old 08-03-2010, 08:52 AM   #2
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Can you provide more information?

I would not make any comments on annuity (myself) until I know more about your situation.

What are your projected expenses for next 5-10 years (while kid is still at home)?

What assets do you have?

House, 401k/IRA/other retirement plans (itemize list so annuity is one of the many items listed)

What is total value of the assets?
How much of the assets are liquid (investments) and how much is in the house?

Have you looked at withdraw rates and inflation and bond ladders?
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Old 08-03-2010, 09:40 AM   #3
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Jimoh,
Projected expenses should be less than 50k/yr (-24k/yr soon pending house sale), probably less for the next 5-10 years. I'm sure we'll need to research buying/retiring the cars in this timeframe.

Total assets 4.7 mil (not including homes, cars or 529 money)
Annuity -777k
IRA/Keogh - 671k
IRA (Wife) - 400k
Taxable assets - 2.4+ mil - mostly blue chip, tech stocks, mutual funds,bond funds.
CDs - 215k (4.5% - 5.25%)
checking account - 200k

529 - 137k
house 1 - about 600k (393k mortgage)
house 2 - about 400k, paid off, just put up for sale 2 weeks ago
1998 toyota camry (116 k miles) - no loan
2003 honda crv (23k miles) - no loan

Our withdrawal rates are really low based on what our expenses are. Both of us grew up poor, so we've always had a coupon shopping/only buy on sale mentality. I believe were under 1% for a withdrawal rate. I don't think inflation should be a big factor based on my asset level (at least that's what the financial people have been telling me).

I have been researching bonds/stock with dividends and been making small muni bond purchases (new only) using Fidelity. I don't have much knowledge in this area, I've only been buying and holding blue chip and blue chip tech stocks in my portfolio. I have about 110k in tax free munis now with coupons in the 4.5- 5.5% range. Also have 350k in short term muni bond funds and 200k in money market funds. My interest/dividend have been averaging around 40k/yr.
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Old 08-03-2010, 09:42 AM   #4
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edit/add:/// I didn't see the previous post of 4.7M NW. If your 'I'm happy' expenses are really $50K, then it doesn't make any difference at all what you do with this annuity. Cash it in and throw the dollar bills into the river if it makes you happy. At a 1% WR, you are splitting hairs several times over. ///



Quote:
Does anyone know of a way to calculate the best age to annuitize in my situation?
I'm no expert, but unless you know the date of your demise, I don't think there is any 'best age' to start the annuity.

The annuity companies calculate this all out so that on average, it is all the same. Why would they want to give the store away to someone at X age versus Y age? To average out their risks, they need to keep them as equal as possible.

Quote:
1) Does it make sense to terminate this annuity, take the 10% penalty and tax on the 267k in gains? I'm told that's about 45% in taxes. The idea is to setup an income stream instead.
That is a huge hit. Do the math to see for yourself. What kind of income stream would the after-tax-and-penalty amount produce?

-ERD50
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Old 08-03-2010, 09:55 AM   #5
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ERD50,
Excluding accidents, I figure the best you can do is use the mortality table estimates. Fidelity tells me late 80's right now and they use 92-94 just to play it safe. I've been looking at the costs and although it's a big tax hit, I still originally funded this with 500k, so the estimate is I'd walk away with around 145k of the gains after paying off the tax bill.

Do you think it's better to just start the annuity now?
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Old 08-03-2010, 10:02 AM   #6
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If you go with the fixed income annuity you should shop around and see what other companies are offering. Don't know what options you selected but $3k on a $767k fixed annuity seems a little low to me. The payout on a fixed annuity could change significantly in a couple years if interest rates go up.
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Old 08-03-2010, 10:08 AM   #7
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Zinger,
Yeah, I'm sure this is because of our age. The annuity people tell me it's not really common for people to trigger an annuity this early in life. That's why the payout is so low. If anyone has triggered an income stream annuity on this website around my age, I'd love to hear what the payouts are like. They told me my percentage is around 4.6 - 4.7%. This is what keeps me wondering am I better off terminating the annuity, take the tax hit and go bonds/fund income stream instead. I had the same thoughts about the interest rates heading higher. The rep told me that doesn't change much since annuities are tied to 10-20 year interest rates. The changes in rates only hand an effect on shorter term interest rates.
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Old 08-03-2010, 10:25 AM   #8
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Quote:
Originally Posted by Dimsumkid View Post
Jimoh,
Projected expenses should be less than 50k/yr (-24k/yr soon pending house sale), probably less for the next 5-10 years. I'm sure we'll need to research buying/retiring the cars in this timeframe.

Total assets 4.7 mil (not including homes, cars or 529 money)
Annuity -777k
IRA/Keogh - 671k
IRA (Wife) - 400k
Taxable assets - 2.4+ mil - mostly blue chip, tech stocks, mutual funds,bond funds.
CDs - 215k (4.5% - 5.25%)
checking account - 200k

529 - 137k
house 1 - about 600k (393k mortgage)
house 2 - about 400k, paid off, just put up for sale 2 weeks ago
1998 toyota camry (116 k miles) - no loan
2003 honda crv (23k miles) - no loan

Our withdrawal rates are really low based on what our expenses are. Both of us grew up poor, so we've always had a coupon shopping/only buy on sale mentality. I believe were under 1% for a withdrawal rate. I don't think inflation should be a big factor based on my asset level (at least that's what the financial people have been telling me).

I have been researching bonds/stock with dividends and been making small muni bond purchases (new only) using Fidelity. I don't have much knowledge in this area, I've only been buying and holding blue chip and blue chip tech stocks in my portfolio. I have about 110k in tax free munis now with coupons in the 4.5- 5.5% range. Also have 350k in short term muni bond funds and 200k in money market funds. My interest/dividend have been averaging around 40k/yr.
If you can live without cashing annuity in, why not keep it and spread risk around?

Meaning this is enough to supply 50k
Quote:
IRA/Keogh - 671k
IRA (Wife) - 400k
Taxable assets - 2.4+ mil - mostly blue chip, tech stocks, mutual funds,bond funds.
CDs - 215k (4.5% - 5.25%)
checking account - 200k
I see $3.4 M in investments, plus $415k cash
this means you have 8 years expenses in cash already
and 1.4% of the $3.4 M will supply 50k in income.

I would not **immediately** annuitize or cash the annuity in. I would wait.

Here is what I would do
1) Verify the $3.4 M of investments and $415k cash are good enough for you (I have no idea of your risk profile and no idea how you planned on funding retirement with the assets you have).
You clearly have enough to retire on, my comment is to look at that pile of $3.8 M and decide how to best allocate it to provide income.
2) Consult a tax professional on cashing in annuity- it appears you have done this already, just verify, if cashed in in 2010, this is tax bill, if 2011 this is tax bill (its possible if you wait to a year where income was zero, the tax bill is lower, so this is why I suggested waiting a year).
3) At one point I was thinking "let annuity grow", but then I realized there might not be a way to pass on to spouse or child, so if there is not a way to make child beneficiary on death, it probably has merit to cash it out, because otherwise 500k is lost at death (because you gave this to company and bought annuity). I would tackle annuity cash in or annuitize from this angle- there is 500k of your money, plus some net gain (after taxes) which can either be given to child, spouse, charity or take you on a great vacation (or two or ten).
Again I think that was your original question, and I see why you are leaning on cashing it out (makes sense to me). But at same time if you annuitized and spread risk around (meaning if market tanked you had another income source).

A third angle, depending on your risk profile and desire to gift wealth to son might be wait until annuity payout equals expense need (if you need 50k of income to meet expenses, annuitize when annuity provides 50k in income). If this occurs, it means all other assets are "not needed" and you could create a way to pass wealth on to other family members.
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Old 08-03-2010, 10:32 AM   #9
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If you are seriously thinking of doing a surrender and taking the tax hit, the tax environment of the future does not look too encouraging for someone in your situation. Since you are out of work, you will be able to capture the benefit of the current lower marginal tax brackets. Be sure you are comfortable with the after tax implications of your choices
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Old 08-03-2010, 11:28 AM   #10
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Jimoh,
I think you got to my concerns in all your points! Based on our spending history and money management, I don't think we'll ever outlive the money. The issue I feel is that since I committed to the annuity (I haven't converted to an income stream, still researching/thinking about it...seems so final a decision to make), the rep thinks I should just convert to an income stream since it's only worth the value (if any) when the 2nd person dies. If there is still money leftover at death, my son is the beneficiary so it will go to him. Since this is a lifetime (like a pension) vehicle, I'm hesitant to cancel this since we can get a lifetime monthly payout until we both pass on. So the rep's thought was to use this to pay most of the necessary expenses and then use the rest of our assets to do whatever, keep it growing and then pass on the leftover assets to our son. We're already near/at the cap of passing on of estate assets. So it makes sense in the future to spend more as time passes.
I've only approached this topic in depth with Fidelity representatives and talked in passing with Vanguard. I'm not sure if the Fidelity opinions are biased since I have my annuity there and if I cancel they lose out on 767k in assets. Vanguard didn't offer me much since I didn't have my annuity there already, so I think it was just a salesperson I was talking to. I asked this question on the Kiplinger's ask a CFP for free advice day and they seemed kind of stumped since they never had anyone my age ask this before, but they didn't think it was wise to terminate the annuity because of the tax hit.

My problem with taking vacations is I ended up doing full time travel for 4 of the last 6 years (100+ rt to CA) and I had no intention of doing this other than to help out a friend for 3 months, then I kept getting extended...repeatedly and couldn't say no (friendship, decent pay). We took a big trip to Hawaii 2 years ago (our 4th time, my son's 1st) while my wife was still working. Travelling full time for 4+ years really got me sick of doing any travelling and it's been 2 years since and I still don't want to do any more time in an airplane. I kind of feel like I don't want to miss out on being around for my son while he grows up. Since my wife got laid off last year, we've been treading the waters seeing if we both can just stay away from work.
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Old 08-03-2010, 11:43 AM   #11
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Originally Posted by Dimsumkid View Post
Jimoh,
I think you got to my concerns in all your points! Based on our spending history and money management, I don't think we'll ever outlive the money. The issue I feel is that since I committed to the annuity (I haven't converted to an income stream, still researching/thinking about it...seems so final a decision to make), the rep thinks I should just convert to an income stream since it's only worth the value (if any) when the 2nd person dies. If there is still money leftover at death, my son is the beneficiary so it will go to him. Since this is a lifetime (like a pension) vehicle, I'm hesitant to cancel this since we can get a lifetime monthly payout until we both pass on. So the rep's thought was to use this to pay most of the necessary expenses and then use the rest of our assets to do whatever, keep it growing and then pass on the leftover assets to our son. We're already near/at the cap of passing on of estate assets. So it makes sense in the future to spend more as time passes.
I've only approached this topic in depth with Fidelity representatives and talked in passing with Vanguard. I'm not sure if the Fidelity opinions are biased since I have my annuity there and if I cancel they lose out on 767k in assets. Vanguard didn't offer me much since I didn't have my annuity there already, so I think it was just a salesperson I was talking to. I asked this question on the Kiplinger's ask a CFP for free advice day and they seemed kind of stumped since they never had anyone my age ask this before, but they didn't think it was wise to terminate the annuity because of the tax hit.

My problem with taking vacations is I ended up doing full time travel for 4 of the last 6 years (100+ rt to CA) and I had no intention of doing this other than to help out a friend for 3 months, then I kept getting extended...repeatedly and couldn't say no (friendship, decent pay). We took a big trip to Hawaii 2 years ago (our 4th time, my son's 1st) while my wife was still working. Travelling full time for 4+ years really got me sick of doing any travelling and it's been 2 years since and I still don't want to do any more time in an airplane. I kind of feel like I don't want to miss out on being around for my son while he grows up. Since my wife got laid off last year, we've been treading the waters seeing if we both can just stay away from work.
Thx for response

your expenses today

and expenses 5 years ago

and expenses 5 years from now

will all be different- you don't want to travel now, but who is to say when son in 14-15-16-17 that you begin to realize that he is not home for much longer and you decide a family vacation to Europe is in order?

I traveled 50% from 1997-2003 or so...
then switched jobs to no travel

now I want to travel for work and play again
life goes in phases, so be flexible.

Congrats on the early retirement
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Old 08-03-2010, 01:36 PM   #12
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Zinger,
The rep told me that doesn't change much since annuities are tied to 10-20 year interest rates. The changes in rates only hand an effect on shorter term interest rates.
The federal employees TSP plan has a fixed income annuity option offered through Met Life. The interest rate has dropped .75% in just the last 5 months. May not sound like much but would come out to about $500/month for what you're looking for. The Met Life annuity interest rate has dropped 2.5% from 3 years ago so it can change significantly over a short term.
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